Tech rally echoes dot-com boom: Time to reduce exposure?

Key points:

• US tech stocks, particularly Nvidia, are surging despite yesterday’s rise in bond yields and a hotter-than-expected US inflation report.
  
  
• Insider selling at Meta and Amazon, along with high valuations and erratic price swings in Nvidia, raise red flags in US technology stocks.
  
  
• Retail investor speculation in options and after-hours trading mirrors risky dot-com era behaviour.
  
  
• Investors should consider reducing tech exposure tactically, increasing bond allocation or diversifying into defensive sectors like healthcare and consumer staples through ETFs. Hedging large Nvidia positions with put options (for large portfolios) or diversifying within the AI theme are also key considerations.

Dangerous behaviour in US technology stocks

On the last day of February we wrote a note saying that US equities had entered the dangerous bubble-like levels again. Since then Nasdaq 100 is up another 2% and Nvidia shares up 16%, and all of this is despite yesterday’s hotter than expected US inflation report pushing the US 10-year yield higher and removing one more Fed rate cut this year to now only pricing three rate cuts. There are several factors that are beginning to paint a dangerous picture of the US equity market and not least technology stocks:

• Insider selling has recently picked up in Meta (see chart below) and recently Jeff Bezos, the founder of Amazon, sold a large amount of shares in Amazon.
  
  
• Nvidia shares are up every single week since the first week of the year.
  
  
• Nvidia’s 12-month EV/Sales (enterprise value to sales) has hit 20.4x. It is not yet at the 2021 bubble peak level, but still the highest in S&P 500 and much higher than Microsoft at 11.6x.
  
  
• Nvidia’s 11% intraday move from high to low on no specific news is also a worrying sign as $2trn companies should not move around this much on no news.
  
  
• Sentiment in Tesla is the weakest in a year with sell-side analysts increasingly giving up on the stock.
  
  
• Retail investors are becoming a bigger and bigger force in US options and also speculating ever more in off-hours trading. Our view is that it is not passive ETFs driving this crazy behaviour but too many retail investors not paying any attention to value, but chasing momentum. Feels like dot-com all over again.

What should investors consider?

As we have repeatedly been saying investors should begin tactically reducing their US technology exposure due to increasing warning signs in the market of toxic speculative behaviour. Strategically for the long-term investor we like the US technology sector, but in the short term things have gone too far. These are some of things an investor could consider:

• Increase exposure to bonds using an ETF on global bonds such as the iShares Core Global Aggregate Bond UCITS ETF (AGGH:xams).
  
  
• Defensive sectors such as health care and consumer staples are also good sources of diversification against a high technology exposure. Again those sectors can easily be accessed through ETFs such as SPDR MSCI World Health Care UCITS ETF (WHEA:xams) and SPDR MSCI World Consumer Staples UCITS ETF (WCOS:xams)
  
  
• For those with large exposure to Nvidia there are also some options:
  • One could consider a put option to protect against a downside move if one wants to preserve the long-term exposure. However, since US options are traded in lot size of 100 this only makes sense for investors with a large position.
  • Diversifying the AI exposure to other stocks listed in our AI theme basket.